Surface Transforms Share Discussion Threads

[graham1ty] 17/12/2018 07:43

Timbo, excellent write up. Many, many thanks

[rivaldo] 12/12/2018 09:39

Cheers longshanks and timbo, much appreciated.

It seems to me to be just a question of time (especially as SCE appear to be satisfactorily funded). Anyone should realise that becoming an approved supplier to a multinational auto or aircraft manufacturer will be difficult and require patience, but SCE appear to be in prime position to secure fully-fledged production contracts within say the next six months to a year if all goes well.

[goldman] 12/12/2018 09:02

Longshanks and Tim, Many thanks guys for keeping us up to speed with what you learned regarding the companies progress. To me it’s all pretty positive, slow it may be but the end results will be very rewarding I’m sure, a little longer if needs be won’t hurt.

[spookies] 12/12/2018 08:36

Thanks Longshanks and Tim. It would seem you both have restored some life back into the share price.

[longshanks] 12/12/2018 07:57

OEMs 1, 2 and 4 are sister companies of OEM 3 and so are waiting on completion of tests for OEM 3.A point was made that it is no accident that OEM 3 is seen as a leader in sports car design and development: they are exacting in the scope of testing which, while frustrating, does deliver a degree of excellence from their suppliers that ensures the ongoing technical edge that underpins their brand.

[albert_einstein] 12/12/2018 07:52

Thanks guys for attending the meeting and your in-depth reports.

Everything seems really positive (as usual) but it's these constant delays that is undermining investor confidence.

A major positive announcement on any of the projects would be a welcome fillip at this juncture.

[balcony] 12/12/2018 07:17

Many thanks,You have both put in the extra mile.

[toffeeman] 12/12/2018 05:48

Longshanks and Tim:

Many thanks for taking the time and trouble to attend and report. It is much appreciated.

Nothing on OEMs 1,2 and 4?

[longshanks] 11/12/2018 23:48

Fantastic notes Tim. Well done on getting them down verbatim: makes mine pale.

[timbo003] 11/12/2018 23:09

Thanks Longshanks, that was quick!

A few supplementary notes from me which will hopefully fills any gaps:

Formal AGM

There were around 20 attendees, which included the directors, two managers (Geoff and Kerry) and around 6 - 8 ordinary private investors

All resolutions were passed with circa 26m votes in favour of each resolution and a few thousand against (total votes cast represented around 22% of the shares in issue). There were no questions on any of the resolutions.

Kevin's presentation lasted about an hour with Q&As as we went along, Michael Cunningham (the new CEO) had a five minute slot (after Kevin) at the end


OEM6:

150 new "V" cars are due to be built (worth £2m to SCE) in a 18 month window, all 150 cars have been sold (deposits paid). There will be another £0.5m revenue from selling “track pack”.

A track pack customer ends up with two sets of SCE discs, they would typically just use the track pack discs on the track and then change back to standard SCE discs for regular use and have the track pack discs put into storage. The two types of discs differ in their cooling pattern.

The gossip regarding a possible delay in launching the new model is due to a part that does not fit properly, it has nothing to do with SCE.

There is a future model (different series) which is intended to have SCE discs, this will be a higher volume and is likely to have a production life of 3 – 5 years.

OEM5:

Scheduled for introduction in single model road car in 2021, 6 year production run anticipated, they are currently testing in the next model up (analogous to introducing into BMW 3 series and testing BMW 5 series).

Everything approved for supply except engineering sign off which involves testing with new copper free brake pads supplied by TMD (copper free will be a mandatory requirement from 2025). The test involves a track test whereby drivers rate performance and comfort on a 1 – 10 analogue scale (pass mark 7.5).

SCE see this as a sign of positive commitment from the OEM and are confident that the disc and pad are compatible and will meet the required standard.

OEM3:

Nomination window for our target model is open until summer/autumn 2019. Still need to pass the salt spray test, the only reason why this is required is that in a few markets they use a particular kind of road salt which has caused problems in the past with carbon ceramic brakes (Brembo do not include this test for their discs). It is a destructive test, the test disc has to survive at least n cycles and five test discs have to survive at least n cycles in succession for a pass. The SCE discs survive the test, but the scatter is too wide (I’m unclear as to whether that means n is too variable). SCE are confident they know how to pass the test and will meet the timings for the current nomination window. There is a test rig in the UK, but test takes 2 weeks to complete. The test results go to the OEM before they come to us which is definitely not ideal

Aerospace OEM:

SCE partnership is with a Fortune 500 aerobrake supplier (not Airframe manufacturer), they are currently waiting for Airframe manufacturer approval. The intention is to provide retrofit on existing fleet, as well as new aircraft. Aircraft carrier helicopters might also benefit from SCE brakes, one trial ongoing, but not at an advanced stage.

Retrofit for McLaren:

There is a big pent up demand for McLaren kits, so the plan is to launch in 2019. Kits will be suitable for all models (except 720S and 600LT)

Working Capital:

Cash position looks ok, £3.3m at end of November, £0.5m R&D credit to come, £200K surplus inventory. No need for more cash assuming OEM6 comes on line later next year.

Possible milestones for next year:

• OEM3: pass salt test to meet 2019 nomination window
• OEM6: announcement that SCE discs will be on next model
• OEM5: announcement that SCE officially selected
• Possible left field: USA automotive and/or USA aerospace

Electric Vehicles:

OEM3 presented to SCE on this subject recently. Around half of braking on EVs is through traditional friction brakes. Proportion of braking through friction vs regenerative braking is determined by complicated algorithm which will depend on many factors, including speed and level of charge of EV batteries. With this and the benefits on weight saving vs traditional metal discs, SCE regard EVs more as an opportunity, rather than a problem.

Brexit:

SCE are quite relaxed, the majority of current production (retrofit) goes to the USA, so this will be unaffected. It will probably be more of a problem getting raw materials in from the EU, rather than getting finished product out to the EU. OEM5 and OEM3 seemed unphased. If absolutely necessary SCE could arrange for the final assembly of the discs to be conducted in Europe.

[longshanks] 11/12/2018 20:26

Brexit is clearly something that they have discussed with the German OEMs and I was genuinely surprised at the relaxed mood music that seems to be coming out of these discussions.The details weren't elaborated on but it is clear that ST is seen as becoming a vital strategic partner for the OEMs. Any border controls and/or tariffs are not likely to be seen as a major impediment to them wanting to source disks from the UK.

[markm1980] 11/12/2018 19:58

Thank you also, Longshanks.

Was there anything more specific about Brexit? I am surprised that there is not more concern over this.

[bdaonion] 11/12/2018 19:11

Longshanks, thanks for the detailed report from the AGM. It sounds very positive albeit still potential delays but what's a few more months when we've been waiting over 10 years. The McLaren deal is excellent considering how long they've been in production and many models there are in use.

[tini5] 11/12/2018 19:10

Thanks for the AGM feedback longshanks, sounds like a positive future awaits.

[longshanks] 11/12/2018 18:14

I attended the AGM today. There was a decent turnout with at least two other members of our ADVFN community (timbo003 and Graham1TY) present.


OEM 6 (Aston Martin) is clearly very important for cash flow next year and we were given more details as to the feeling that there could be a short delay on the start of production. It would seem that there are rumours about a component for the Valkyrie (nothing to do with ST) that needs to be adapted, and that this could result in a 3 to 6 month delay. There is no confirmation from AM on this and it could be that no delay arises. Either way the board felt it prudent to prepare themselves (and the market) just in case. Michael Cunningham (FD) spoke on the fact that he had done stress testing taking into account a 6 month delay and that the company had sufficient cash.


OEM 6 are already discussing future models in some details. The current nomination is for a limited run of 150 vehicles with anticipated sales of approx £2.5m over the next 18 months. This includes sales of disks for a "track pack" that they expect to be taken up with one in four of these vehicles.


Future models would be for a significantly higher volume and would have a production cycle of 3 to 5 years.

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The near-OEM and retrofit market is doing very well. They anticipate annual run-rate of upto £2m from this and are due to start selling disks for retrofit on McLaren cars in early 2019 due to unprecedented demand coupled with a significant upfront order from a distributor.

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OEM 5 have clearly developed a good working relationship with the company. With the recent statement, the company has been given approval to start supply - subject to meeting the engineering requirements of the disks. I personally had found this statement a little vague as to it's meaning. There was no mention within it of "VDA 6.3" the qualification that we had always been looking to be met for the German OEM's, and hence for me it was unclear if this standard had been met or not. It is the case that the company has met the necessary standards for OEM 5. I was promised some words to clarify this in the next company report.


Regarding Engineering approval from OEM5, the current trials are going well and as mentioned in the statement have been extended to test the disks with a new pad material. The fact that OEM 5 want to do these tests with ST rotors should be seen as a hugely positive move as it indicates the importance to OEM5 of using ST as a supplier. The current tests are to supply a model with a six year production run. Nomination for that model could come at any time but needs to be declared before Autumn 2019, but they are already discussing other future models now. The run-rate for OEM 5 will be £3-4m p.a. with SOP anticipated in 2021.



Work with OEM3 is still ongoing. There is a remaining test - this has been ongoing for almost 3 years - that needs to be satisfied. It is a destruction test and whilst the disks have met the required standard, the variation in results has to date been too wide and it is that variation that needs to be addressed. I spoke with David Bundred and Geoff Whitfield after the meeting and it would seem that they have made a decent breakthrough in understanding and resolving the cause of the variability. Either way - the commitment from OEM 3 to resolving this is telling: last year ST and OEM 3 were working with quarterly reviews, that has now stepped up to bi-weekly reviews.


The nomination window for OEM 3 is currently open and will run through to late summer 2019.


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Brexit:

There was some discussion on the impact of Brexit for the company. It was quite clear that this is something that doesn't seem to worry the company, mirrored one feels, by a relative lack of concern coming from the German OEMs. It would seem that they have had some discussions and that any issues arising are all seen as very manageable.



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U.S. Automotive:

The company already supplies a number of near-OEM companies in the US. It would seem though that there is some very real interest coming from a much more substantial US OEM. We were given no details - only hints - but I would say that there is a real possibility of us seeing OEM 7 listed some time in the next 6 to 12 months.


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Operations

OEM production cell will be complete in the next quarter. There is a two stage plan for ramping up production: stage 1 - 8000 disks, stage 2 - a further 7000 disks. As and when both OEM 5 and OEM 3 are nominating vehicles to use ST disks, the company will build a new OEM cell. A new cell takes two years to commission and costs £7m with a 15 month pay back period.


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The board, as always, were rather upbeat. There was acknowledgement that the current markets are rather poor but I came away feeling that this is one stock that has strong credentials to actually thrive in a post-Brexit Britain. ST is just one of two suppliers in the world of carbon-ceramic brakes and their material is best-in-class. Brembo/SGL currently have sales of £140m p.a. By this time next year, ST will be supplying OEM 6, operating with cash break-even, and we should see sales start to grow significantly.

[graham1ty] 11/12/2018 18:00

Yes. Pretty positive. Have got 6pm meeting. Hope notes to follow tomorrow

[toffeeman] 11/12/2018 17:44

Anyone go to the AGM?

[swiss paul] 06/12/2018 13:56

I would hope it goes up as the chart from July is far from pretty - smart guy our Mr J - well smart in his personal finance dealings, as to bringing profitable products to market that waits to be seen

[longshanks] 06/12/2018 10:40

No lock-in.

[sate_uk] 06/12/2018 10:19

Is he locked in for a period before he can sell them?

[longshanks] 06/12/2018 10:07

Absolutely Riv, my thinking is the same.Taking out the options early minimises any CGT liability should this be a low point, and the fact he is also SIPPing these shares is further evidence that he anticipates some decent capital gain.

[rivaldo] 06/12/2018 09:49

Intriguing. The 345,000 9p options weren't due to expire until March'20, and the 330,000 11.5p options were to expire in Feb'22.

So KJ evidently feels that it's advantageous to exercise these options extremely early and be subject to a small income tax bill at the current share price, rather than wait and get hit with a much larger immediate bill at a later date - presumably because he feels the share price is going to go up materially from here.

Alongside this year's Bed & ISA-ing of large shareholdings by both the Chairman and Richard Gledhill, this is another sign that the directors are gaining confidence that things will be happening here.

[albert_einstein] 06/12/2018 08:24

My apologies, I misread the statement. His purchases were exercise of options and not in the open market.

[graham1ty] 06/12/2018 08:13

Albert, from c2009-14 they traded in a range 7.5p-15p, with only a couple of spikes above that level.

The fundraisings in 2013 were at 8p and 8.5p. So, look positively, we are up 50% since then !